Irish property bubble

This article is about the housing bubble in Ireland. For the general phenomenon of housing bubbles, see real estate bubble.
Contents[hide]
1 Current situation
2 Contributing factors
3 Growth background
4 Crash predictions and denials
4.1 Predictions
4.2 Denials
5 Facts and Figures
6 References
7 See also
8 External links
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[edit] Current situation
Newspaper articles have provided anecdotal evidence of declining valuations with respect to the guide prices, and the agreed prices for Irish Residential property, since October 2006. This phenomenon was officially vindicated by the last ESRI report, which indicated that for 2007 as a whole, property prices have fallen every month. This has come on the back of annual increases in the cost of residential property every year since 1993.
An IMF report in 2000 contended that Irish property prices were unlikely to continue to grow strongly for long, since it would go against all evidence collated in other countries that had seen rapid price appreciation.[citation needed] House prices went on to triple between 2000 and 2006. Nevertheless, demand for residential property has fallen since the beginning of 2007, and this has resulted in price decreases for March 2007 of 0.6%, and for April 2007 of 0.8%. This has led to an expectation of a drop in house prices on a quarterly basis for the first time since 1994. Houses in the commuter belt around Dublin fell earlier, due to a combination of increased supply within the Dublin Urban area, increasing interest rates and continuing infrastructural issues in rural communities. Prices in large urban areas are static, though demand has dropped noticeably. Construction employment has dropped according to Live Register statistics for May 2007.
Since 2000, approximately 75,000 housing units have been built every year as detailed by the Department of Environment, Heritage and Local Government [1]. However, a significant proportion of these new homes are unoccupied. Economic commentators give a figure of approximately 230,000 vacant properties. Of these up to 115,000 or so may be holiday homes.[2]
Figures exist for completions because the ESB provides information on the number of properties newly connected to the electricity network and from data supplied by Local Authorities and from The Dept of the Environment and the CSO.
Currently (2005) there is enough zoned land to accommodate 460,000 new homes, though as housing density figures continue to rise each year existing land has the potential to provide an even greater number of housing units.[3]
There had also been reported cases of mortgage fraud where borrowers over-estimate their income to enable them to borrow more. There is a worry that these people "could fall into serious debt if Ireland had a property crisis like that in Britain in the late 1980s."[4] This experience has resulted in the "sub-prime residential mortgage fallout" in the United States.
In December 2006, the Irish state-owned broadcasting organization, RTE, broadcast an investigation in a Prime Time documentary which unearthed evidence of financial details of prospective customers were being sold by mortgage brokers to auctioneers. Such information would enable auctioneers to maximize the price attained from prospective buyers. This issue, and further allegations in this area, are currently being investigated by the Irish Office for Data Protection.
As of July 2007, estate agents in Dublin were reported to be offering incentives such as six months worth of mortgage payments to prospective buyers, in an attempt to avoid lowering the recorded sale price. [5]

[edit] Contributing factors
1. Increased prosperity. Since 1994, the Irish economy has benefited from considerable inward investment from the multinational sector. Irish education standards were perceived as high relative to those existing in other predominantly English speaking or English speaking countries. Improvements in the technical education area as a result of EU investment also played a key role in upskilling the Irish workforce. The combination of high education standards, and high capitalization ratios in the investment projects resulted in considerable improvements in labour productivity in the economy as a whole. This has resulted in increased wage levels in the traded sector of the economy.
2. Demographics. Ireland's population encountered a boom in the 1960s, and this coupled with a recession in the UK in the 1970s resulted in a baby boom occurring in Ireland from 1965 onwards. This reached its peak in 1979. This boom in the population gradually fed into the labour market from the late 1980s onwards. When unemployment was high young Irish graduates and labourers worked in neighbouring EU countries, and sometimes illegally in the US. However improving economic prospects at home induced many to return from 1994 onwards. This return migration peaked in 1999. From 2001 migration from other countries has been an increasingly influential factor in the demand for residential housing. From the mid 1990s, increasingly difficult labour markets for graduates in continental Europe, and the requirements of many service companies for graduates with language skills, has resulted in inward migration from Spain, Germany, and France. The accession of new members in Eastern Europe, into the EU resulted in many people from Poland, Lithuania, Latvia, and the Czech Republic also participating in the Irish labour market. However unlike their Western European counterparts, these workers tend to work in jobs that require a wide range of lower level skills, as a result of different standards and proficiency in the English language. Shortages in the health sector has also resulted in the need to qualified personnel from the Philippines, India and South Africa.
3. Interest rate policy Property valuations were rising before Ireland joined in the initial launch of the Euro in 2002. This was mainly due to a very buoyant traded sector, and increasing state expenditure. The fact that the Euro interest rates were lower than the interest rates caused Irish property values to increase further. Overtime the scale of residential mortgage debt reached proportions that was of concern to the Irish Central Bank.
The increasing cost of property and the willingness to borrow money to acquire Irish property has resulted in substantial increases in the total level of private sector debt, due to property investment in the Irish economy. This has become of increasing concern to the Irish Central Bank, which has issued many warnings, in an effort to affect consumer behaviour.
4. Feelgood factor. The fact that property valuations were steadily increasing tended to create a systematic feedback loop, where rising prices affected the psychology of market participants, causing further increases in prices. Public sector pay deals like the benchmarking program, tended to spread the feel good factor to the state sector, causing further competition in the market, with people in state jobs competing with workers from the private sector, whose long term job prospects were not as secure.
Rising property values in Ireland, and prosperity acquired from property trading, has been a strong factor influencing Irish people, to invest in overseas property. The main focus of such activity has been the newly admitted members of the European Union. Irish corporate concerns have also become substantial investors in London, Berlin, Paris and American cities.
5. Planning Policy. Irish planning policy has been the subject of much debate between academics and political parties. A critique of Irish Planning Policy would include references to the lack of systematic planning, insufficient 'joined up thinking', and considerable pandering to vested interests and local concerns. Property valuations have been inconsistent across the state. The most influential factors are often the performance of the local labour market, and the availability of sufficient quantities of serviced development land. The largest urban areas have experienced the most growth, with the property boom more pronounced in Dublin than elsewhere, especially in the areas beside Dublin Bay, where planning is most restricted, and the amount of accumulated wealth is highest. Irish Planning Policy has failed to create high density residential housing schemes near transport infrastructure, with the exception of the Adamstown and Ashtown proposals in the Western suburbs of Dublin. The fact that Dublin occupies a footprint the same as Berlin, with one third the population, and both have equal space devoted to parkland is an example of how low density housing dominates. This causes problems in providing justification for heavy usage public transport infrastructure.
The increase in property prices has also resulted in high prices being paid for development land. Irish property valuations are highest in Dublin, where the valuations are being driven by confidence, the highest salary rates in the Irish economy, and heavy US private sector direct investment. Valuations are most pronounced in locations that are perceived as the fashionable residential locations. This has resulted in the redevelopment of many sites to build apartment complexes in the Dublin 4 district. The valuations in this district have become the most expensive in Ireland. The sale of the Veterinary Surgeon site, in Dublin 4 by University College Dublin (UCD) for a price of €171.56 Million occurred in 2005. This accounted to a cost of almost €85 Million per acre, or €212 Million per hectare. This record was beaten in 2006, by the sale of another site, again in Dublin 4, also owned by UCD, in 2006, for €36 Million. This equates to €95 Million per acre, or almost €240 Million per hectare. There were several sites in the same district which made similar prices. In many cases, the developer has to face down local objections, which delays the planning process for redevelopment substantially. These proposed development projects will prove difficult, if not impossible to initiate.
Another side-effect of high urban housing valuations is a drift into rural hinterlands to live in lower cost housing. This has happened on a substantial scale in the greater Dublin area, in counties Wicklow, Kildare, Meath, Louth, and Carlow. This results in over development in rural villages, and provincial towns as residential developments exceed the pace of infrastructural development, and services for urban population. This may create social and environmental problems, in rural areas. It also leads to locals being unable to live in their own area, due to prices rising at a rate greatly in excess of local wages. Another effect is this development of increased commuting times for people living in locations that are distant from the large employment centres. This has increased demands on the transport infrastructure, with the Irish public transport company CIE being asked to upgrade capacity in a short time. Ireland's increasing carbon dioxide emissions due to increased road traffic are also causing Ireland to breach previously agreed commitments contained in the Kyoto Accord. These breaches will result in direct cost to the Irish exchequer. The Irish state budget for the fiscal year 2007 contains a number of initiatives and incentives to improve energy efficiency in other areas, and reduce the overall cost of this measure in the future.
To address a perceived lack of planning on the part of Irish state bodies, and to develop poles of growth in the regions, the Irish government initiated the National Spatial Strategy. This was initiated to spread urban development to region centres. However, this contained many promises that were not feasible. It also resulted in standstill, due to disputes over local concerns.
The Irish government's Decentralisation Plan for the Civil Service, was created in 2004, and was based loosely on the model previously implemented in Denmark. One of the expected results of this move is to reduce the share of Irish state investment in Dublin, and thereby alleviate the difficulties experienced by first time house buyers in the city. Because the age profile of civil servants is older, than people employed in Ireland's private sector, this would effectively result in older people making way for younger people in Dublin. This would also result in an overall reduction in the cost of doing business in Dublin, and thereby preserve its attractiveness as a location for direct investment. However this was only partially successful, with the first location to fill its allocated quota, being the one nearest to Dublin, Trim. Many civil servants have expressed a wish to reside in other urban centres with sufficient third level institutions, for example Galway. Implementation of the Decentralisation plan is considerably behind schedule, and it remains to be seen how this will eventually completed.

[edit] Growth background
Interest rates set by the ECB are only guided by low inflation targets in the Eurozone. Some feel this too narrow an objective, leading to decisions on interest rates that are inappropriate, eg. in a country with record levels of employment, rising house prices and consumer spending. The Irish economy has fallen down the global competitiveness table from fourth to thirtieth in the past three years due to the rising costs of doing business.
The housing boom is responsible for the employment of approximately 20-30% of the working population. The independently produced Review of the Construction Industry, commissioned by the Department for Environment, estimates that 12% of the workforce are employed directly in the construction industry.[6]

[edit] Crash predictions and denials

[edit] Predictions
The Economist newspaper says that a large bubble exists in the Irish market.[7]
The Economic and Social Research Institute in Ireland says that a bubble probably exists. [8]
The IMF says that residential property in Ireland is overvalued. [9]
The OECD and certain senior Irish officials of the Central Bank and Financial Services Authority of Ireland agreed in November 2005 that Irish Property is overvalued by 15%. However this was only released to the public by The Irish Times shortly afterwards[10]. The Central Bank denied that they had deliberately withheld this information to avoid triggering a crash, and in April 2006 said the housing boom may be "unsustainable" and poses a "significant risk" to the economy.
Most Economists think that property prices are unsustainable because rental yields have fallen below the risk free rate of over 3.5% offered by Government bonds.[11]
The Economic and Social Research Institute issued a statement on 18 April 2007 in light of the RTÉ documentary on 16 April 2007 stating that the only activities there is economic certainty in is cigarette manufacturing and undertaking.

[edit] Denials

An advertisement for 100% mortgages seen outside Dublin (17 July 2007)".
Many estate agents and banks continued to offer and promote 100% mortgages in the market until recently.

[edit] Facts and Figures
Inventory is rising fast all over Ireland at unprecedented levels (http://daftwatch.atspace.com)
12.6% of the Irish workforce is employed by the construction industry.[12]
9.4% of Irish GNP is dependent on construction. Of this new residential housing construction makes up nearly 7% of GNP.[13]
There is no true shortage of land, only a shortage of planning permission. Even in Dublin, Cork, Limerick etc. there is no shortage of land.[14]
The P/E ratio (Total Price divided by annual earnings) for private housing is at an all time high. A Davy Stockbrokers report (Mar 06) suggests that for prosperous Dublin suburbs the ratio could be approaching 100 times. Davy states that these ratios can only be justified if investors are extremely bullish about rental growth. Given the plentiful supply of rental properties in these areas however, Davy suggests that it will be an adjustment in property prices, rather than rents that will eventually bring valuations down to more realistic levels.[15]
The Daft.ie Report Quarter 2 2006,[16] which provides a comprehensive analysis of recent trends in the Irish property and rental markets has indicated that the average gross yield of a Buy-To-Let property investment in Ireland is 3.27%. This rate of return is considerably lower than any available mortgage rate in Ireland [1] and also lower than the Jan 2007 ECB base rate [2].
ECB interest rates (Jun. 2007), although still accommodative at 4.00%, are now almost 50% higher than 12 months ago (2.75%).
Many Jumbo mortgages are taken out in Ireland.
Consumer behaviour in Japan is really not so different from Ireland or indeed any other capitalist society. If house prices decreased there for 14 years, then the same is possible in Ireland.
A very high proportion of new houses in Ireland remain unoccupied.[17]
A slowdown in property value growth combined with more profitable property investments abroad could reduce the number of domestic property investors thus exacerbating any slowdown.
The number of houses per thousand of population is lower (~391) than the EU average (~428) (this would suggest that there is greater demand for Irish housing that in the rest of the EU).
Prices are starting to fall: irishhousepricesfalling.blogspot.com[3]
Prices down by 5% as of Nov '07. [4]

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